South Korea's Fair Trade Commission (FTC) has internally deemed Qualcomm's patent licensing practices for smartphone-making clients and chip competitors to be an abuse of standard essential patents (SEP), an abuse of its dominant position, and against fair, reasonable, and non-discriminatory (FRAND) terms, people with knowledge of the matter told ZDNet Korea. SEP refers to patents that are needed for companies to do business in a certain industry, with the holder required to license them to the licensee under FRAND terms.
The FTC launched the investigation on April 28, 2014, and sent out a request for information (RFI) to Qualcomm sometime in August last year, sources said. The regulator then sent out RFIs to handset manufacturers and chipset makers, clients, and competitors of Qualcomm that are either based in or have regional offices in South Korea on March 5 this year, and received replies from all of them by March 13.
South Korea is home to smartphone giants Samsung Electronics, LG Electronics, and Pantech -- with all three being Qualcomm clients. Rival chipset makers Intel and AMD also have offices in Seoul.
The FTC concluded its analysis on how Qualcomm's business model is economically anti-competitive in April, and plans to issue an evaluation report sometime in June. A final decision, after reviewing the report, will be made public within the year. It is expected that the FTC will likely fine the chip giant.
Qualcomm currently collects royalty payments from clients that are calculated based on the price of the handset, not the price of the chip. The company reportedly collects around 5 percent of the sales price of smartphones that use its chips.
However, it is yet uncertain whether the FTC can force Qualcomm to change the way it measures the amount it levies from its clients, or whether it will fine the chip giant. A decision to punish Qualcomm may negatively affect US-South Korea trade relations.
In a recently issued statement to the South Korean media, the FTC confirmed that an investigation is ongoing, but said nothing has been finalised on what penalty or fine it plans to enforce on Qualcomm. It also did not name which handset makers and chipmakers made the initial complaint, or what companies it sent RFIs to. An FTC spokesperson said he had nothing to add to the statement.
Qualcomm has been facing pressure globally to change is patent licensing practices.
In February, the Institute of Electrical and Electronics Engineers (IEEE), an international standards body for communications electronics, made public its decision to change its suggested licensing policy for members. It asked members to license their patents reasonably and to the "smallest saleable implementation" from now on. In other words, for Qualcomm, it means royalties should be calculated based on the price of the chipset, not the entire handset.
In the same month, Qualcomm agreed to pay $975 million to Chinese authorities to end a 14-month antitrust investigation into its patent licensing practices. The fine was the largest in China's corporate history, and will require the firm to lower royalty rates on patents used in China's mobile phone market.
Qualcomm has faced investigations in South Korea before. In 2009, after a lengthy investigation that lasted three-and-a-half years, the regulator fined the chip giant for collecting "discriminating" royalties for its Code Division Multiple Access (CDMA) patents, which it considered to be standard essential patents (SEP). Qualcomm filed a suit against the decision. The case has been in the Supreme Court since 2013, and is yet to end.
"Qualcomm's de facto refusal to supply near-monopoly LTE and CDMA chips unless a handset maker signs a licence agreement is tantamount to seeking an injunction against the handset maker in the segments of the market that incorporate these chips," Sang-seung Yi, a professor at Seoul National University's School of Economics, said in Seoul on Monday. However, he stressed that he is using the current Qualcomm case and information available publicly as an example only, and is not privy to the full facts of ongoing investigations.
"Since Qualcomm is dominant in the chip market, it is my proposition that Qualcomm's refusal to grant a patent-exhausting licence to rival chipmakers might constitute a violation under the competition law," he added. Qualcomm does not grant the use of its chipsets unless the user signs a cross-licensing agreement with it.
"The owner of standard essential patent has an obligation to license these technologies," said Cecilio Madero Villarejo, deputy director-general for antitrust at the European Commission, at the discussion.
However, the precise definition of SEP and FRAND remains debatable. How to assess the value of a certain patent is also extremely complicated.
"Valuation of thousands of patents used in a single smartphone ... remains difficult," said Hong Dong-pyo, an adviser at law firm Lee & Ko.
Frenemies in Korea
Qualcomm's relationship with South Korea stretches back nearly two decades. The country chose the then-middling tech firm's CDMA tech to use for its third-generation (3G) network in the mid-'90s.
The San Diego-based firm has been cooperating with South Korean telcos, as well as handset makers Samsung, LG, and Pantech, since then. Before the rise of smartphones, South Korean manufacturers used Qualcomm-made modem chips for their feature phones for over a decade. The rise of 4G only cemented the US chip giant's position as the industry standard, and its patents and chips are widely used by South Korean firms.
While Samsung and LG have grown to become a hefty part of Qualcomm's revenue source, the companies have meanwhile been developing their own chipsets to lessen their reliance on the US chipmaker's processors and modem chips.
Samsung, in its newly released Galaxy S6 and S6 Edge smartphones, put in its self-developed Exynos 7420s as application processors (AP) instead of using Qualcomm Snapdragons as it did in its preceding flagship models.
LG, in turn, has developed its own Nuclun AP that it has put into a budget phone model for sale in South Korea only. It is developing new APs to put into flagship models, though it may cancel this to maintain its relationship with Qualcomm, and due to its own lack of technology know-how.
Which modem chip is used is not disclosed by either Samsung or LG, but the majority of them are suspected to be Qualcomm's Gobi series.
Intel has also been attempting to lure Samsung into using its own processors as a way to boost its mobility business. According to a source familiar with the matter, Intel has offered the South Korean tech giant lower prices than Qualcomm's in order to increase its supply volume. Samsung has been using Intel chips for some of its budget model smartphones, though never a flagship model as of yet. AMD is also trying to woo Samsung, but with less success.
Spokespeople for Samsung, LG, and Pantech declined to comment on the matter. Spokespeople for Intel and AMD were unavailable for comment.
Qualcomm declined to comment.